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KB Toys merges with BrainPlay.com

The move comes as eToys prepares for its IPO and Toys "R" Us ramps up its online strategy.

In a move to stay competitive in the online toy market, KB Toys will be merging its online store with retailer BrainPlay.com to form a new company-KBToys.com.

Consolidated Stores, KB Toys' parent company, will invest $80 million for an 80 percent stake in the new company. BrainPlay.com--which will contribute all of its assets to the venture and close down its existing Web store--will own 20 percent.

The move comes as online toys leader eToys prepares for its initial public offering and one month after retail giant Toys "R" Us and manufacturer Mattel announced new online strategies.

Consolidated wanted to act quickly to improve its Web site and gain market share, said Michael Wagner, vice president of strategic planning and investor relations. BrainPlay.com, he added, offered the management expertise that KB Toys' site lacked. And, he said, combining with BrainPlay.com is the best way for KBToys.com to ramp up for the holiday season.

"Our site is not as robust as BrainPlay's is," Wagner said. "We thought it would take much longer to try to enhance our own site rather than get together with BrainPlay."

The deal could give KB Toys some advantages over an online-only retailer like eToys, said Forrester Research analyst David Cooperstein. For instance, KB Toys could allow online customers to return gifts at their bricks-and-mortar stores. And the deal could permit KB Toys to limit the amount of inventory each store carries by allowing customers to order toys online via in-store kiosks.

"The word of the week is that bricks-and-mortar plus Internet equals a successful model," Cooperstein said.

Questions about returns has turned some customers away from buying from eToys and other online-only shops, Cooperstein said. "If KB is willing to take returns in-store, it will go a long way toward driving people to their site, rather than someone else's."

Jupiter Communications estimates that the online toy market will grow from $52 million by the end of this year to about $555 million in 2002. Those figures exclude children's videos and books, which many online toy stores carry as well.

Consolidated Stores said it will spend the $80 million on marketing KBToys.com site.

Srikant Srinivasan, founder and chief executive of BrainPlay.com, said his company turned down alliances with other firms before reaching agreement with Consolidated Stores. Srinivasan, who will be chief executive of the new company, said KBToys.com will measure up well with competitors such as eToys and Toys "R" Us.

Compared to Toys "R" Us, which is still putting together its online strategy, "we've got everything in place and are ready to go," Srinivasan said. "Come this holiday season, we're going to find that we're a major player in this space."

BrainPlay.com's staff will operate the site out of the company's Denver offices. Wagner said there will be no layoffs at either company as a result of the merger.